The International Scope of Say on Pay

1. The International Scope of Say on Pay Randall S. Thomas And Christoph Van der Elst

2. Arguments in Favor of Say On Pay • Make corporate management more accountable to shareholders and shift balance of power in favor of shareholders. • Encourage boards to align pay and performance. • Arrest the upward spiral of pay levels. • Push boards to eliminate pay structures that encourage excessive risk taking.

3. Arguments Against Say On Pay • Upset the traditional balance of power between managers and shareholders. • Shareholders are poor judges of proper pay practices and levels. • Increase power of ISS and voting advisors. • Increase disclosure and voting costs, especially for smaller companies. • Push American companies to adopt one-size-fits-all pay programs.

4. International Say on Pay • We study several countries that have enacted this legislation -- the U.S., U.K., Australia, Belgium, the Netherlands and Sweden, plus two that have come close– France and Germany • Significant variations exist amongst the countries about the type of vote and its effect – advisory or binding

5. The U.K. Experience • In 2002, U.K. adopts advisory SOP vote on management’s remuneration report • Shareholders largely supported SOP proposal between 2003 and 2009, but with growing opposition after financial crisis • Public dissatisfaction with executive remuneration levels leads to enactment of binding SOP vote beginning in 2013

6. U.S. -- Dodd Frank’s “Say On Pay” • As of 2011, Dodd-Frank Section 951 requires public companies to give their shareholders an advisory SOP vote on top executives’ pay during the prior fiscal year • Shareholders have generally approved SOP proposals with only 1-2% failing to obtain 50% approval and most receiving 90+% support

7. U.S.– Early Voting Experience • Low stock returns and high CEO pay resulted in lower support for say on pay proposals -- Firms with CEO pay in the top quartile and TSR in the bottom quartile received the weakest average shareholder support levels (73.9%). • In 2011, ISS issued negative say on pay recommendations at 285 firms, but 86% of them still obtained majority approval of their executives’ pay packages.

8. Australia – Two Strikes Rule • In 2003, Australia mandated a new executive remuneration report and gave shareholders an advisory SOP vote on it • Shareholder opposition to SOP proposals grew, especially after the financial crisis • In 2011, Australia adopted the two strikes rule – if in first year, 25+% of SH’s vote no, then in year two, 25+% vote no, SH’s are required to have a third vote on board “spill”

9. Belgium • In 2010, Belgium adopted a requirement that companies provide shareholders with a detailed executive remuneration report and there is an advisory SOP vote • Mean approval rates are around 90% for Bel 20 companies but a few dispersed ownership companies barely passed • Many Belgium companies have control SH’s though so little chance of losing SOP

10. Sweden • Since 2006, the AGM casts an annual binding SOP vote on the directors’ proposed remuneration policy • In 2010, shareholder approval rates were around 90% with many controlled companies • One exceptional defeat occurred at TeliaSonera when the Government voted its 37% block against the company

11. The Netherlands • Beginning in 2005, shareholders must approve company remuneration policies and any material changes to them • Corporate minutes show regular heavy debate of policies, although defeats are rare with average approval rates of 90% • Several remuneration reports have been withdrawn in the face of SH opposition

12. France • Shareholders vote to approve directors’ fees, option/restricted stock plans, termination plans and retirement plans • In 2013, France required companies to have a SOP vote or explain why they did not do so – SH vote on pay of officers • This has stalled mandatory SOP but government is considering new taxes for excessive remuneration packages

13. Germany • In 2009, Germany permitted SH advisory SOP vote on the remuneration system of the management board • While not mandatory, all DAX companies had their system approved at least once since 2010 with SH approval around 90% • Few companies had significant opposition • In 2013, German Corp. Gov. Comm. proposed executive pay cap

14. Summary of Countries’ SOP • SOP varies – binding vs advisory; remuneration report vs actual pay levels; future vs past practices; voluntary vs mandatory vote • SH approval rates hover around 90% but there are usually a few companies that do much worse and then make changes • Presence of a control shareholder insures a favorable vote

15. Why is SOP Being Adopted? • Dispersed ownership countries – SOP can be viewed as a pay monitoring mechanism • Concentrated ownership countries are in some cases moving toward greater dispersion and use SOP to help fill the new monitoring gap • Institutional investor (especially US and UK) stock ownership increases lead to greater monitoring of pay

16. Why is SOP Being Adopted? • Social intolerance of pay inequality – Aussies and Continental Europeans appear more opposed to this gap • Politics – Social Democrats and left wing parties have been introducing SOP • State ownership of enterprises – pay is a politically sensitive topic and indirect regulation (SOP) is easier than direct caps

17. Predictions • SOP will not have much effect on overall pay levels; rather it will impact pay outliers and not the average company • Public pressure will continue to build to regulate pay directly, especially in countries where income inequalities are less socially acceptable and left-center governments are in power • More EU/OECD countries will adopt SOP